Insurance

Not having the appropriate insurance coverage in place to protect you from the unexpected can wreck any well thought out financial plan. If you lose your ability to earn and save and are under or uninsured from a loss of life or disability, then all of the reading you have done thus far will be of little to no help to you.

Life Insurance

It is hard to earn and save money when you are six feet underground with your toes pointing to the sky. So, if you have a family and your family is reliant on your income to fund expenses and save for the years ahead, then you need to protect them from a loss of your life and your loss of income.

Term life insurance is coverage on a loss of life for a certain number of years. This insurance is generally cheaper since it isn’t covering your loss of life forever, but instead only for the number of years on the policy. If you are 30 years old and just starting a family then you can consider buying coverage for a 20 or 30-year term. At the end of that term, if you have followed our savings strategies correctly, then your family will hopefully not be exposed financially to a loss of your life since your investment assets will be significant at that time. And, any kids will likely be out of school and no longer dependent on your earnings.

Whole life insurance generally does not have a time when the coverage lapses like with term insurance. Since the coverage continues throughout your life, and it will certainly pay out at the time of your eventual death, it is therefore much more expensive than term life coverage.  The insurance industry has many life insurance products that mix aspects of investments within the policies, but you will be best served to just buy insurance for the risks you need to be covered and then take any extra money and invest those funds as we detailed previously.

In determining the amount of life insurance you need you should consider how you could replicate your income stream from an investment portfolio that can be created from a life insurance payout. If you are the sole earner in your family then you will want your surviving family to have insurance proceeds large enough so they can be invested and spent to fully replace your income. An appropriate sustainable spending rate from a properly structured investment portfolio is roughly 5 percent. If you spend more than 5 percent of the portfolio on an ongoing basis then you can run the risk of depleting the account. So, if you make $100,000 and you want to fully replace that income for your family if you pass away then $2 million in term coverage would create enough proceeds for a 5 percent spending rate to replicate your income.

Generally, it is better to be slightly over insured than underinsured so that your surviving family does not face financial stress in a time of grieving. You can get quotes from multiple term life insurance providers online at www.selectquote.com.  In the case that you do not have a spouse, children, or other family members that are reliant on your income then you likely do not need to purchase life insurance.

Long-term Disability

Statistically you are much more likely to incur a disability that causes you to be unable to work instead of facing an early death (don’t you just LOVE how morbid this discussion is progressing???).

Disability insurance can help you replace your lost earnings should you face an illness or an injury that prevents you from doing your job. Short-term disability insurance is likely not necessary since if you have a temporary loss of income you should be able to fund that with your emergency cash reserves that we discussed previously. The large risk is if you incur a disability and can’t return to work for many years. Long-term disability insurance can replace part of your income for very long time frames like up until age 65.

When reviewing policies it is important to make certain that your policy covers your “own occupation” and not “any occupation.” For example, if you are a surgeon and you lose two fingers in a fireworks accident then you are certainly unable to return to your prior occupation. But, you would be able to continue working in a clerical capacity (despite at a much lower income). Policies that cover your “own occupation” will pay for the loss of your wages relative to your current job. “Any occupation” policies might not pay benefits unless the degree of your disability prevents you from returning to any type of work.

If you are provided disability benefits through work and your employer pays for the insurance costs, then any benefits you receive if you become disabled are taxable to you just like that of your salary income. If you purchase the coverage personally and begin receiving benefits, then the disability benefits are not taxable. Generally, you can only cover up to 70 percent of your income as insurance companies do not want to cover your full earnings levels.

You can lower the costs of your disability policy by increasing the “elimination period” of the policy. This guides when the insurance benefits would begin to be paid, so if you have an elimination period of 6 months then you would have to be fully disabled for more than 6 months before receiving benefits. Since we want to just protect ourselves from catastrophic long-term disabilities, then you can select a longer elimination period to lower your ongoing premium costs as long as you have the cash reserves to cover that gap of income.

Everyone should have some plan in place for long-term disability so they aren’t only reliant on disability benefits from Social Security if they incur a major injury or illness. Work with an independent local insurance agent to help you find the appropriate coverage for your line of work.

Home, Auto and Umbrella Insurance

When you file an insurance claim for your home or vehicles you will have to pay a “deductible” for each claim, meaning you are liable for the first say $1,000 of the damages and the insurance company will cover the rest. If you have a comfortable cash reserve then you can afford to cover these deductibles in the event you need to file a claim. By carrying a higher deductible policy you can lower the cost of the insurance policy since you are shouldering more risk. But the lower ongoing premium costs can help you increase your investment savings elsewhere.

If you own a home then be sure that your policy can cover the expenses of fully replacing your home (not just the current value of the home).  Also, make sure that you have protections in place for inflation to account for the rising costs of replacing your home in the event of total loss. If you don’t own a home, look into a rental insurance policy to cover the cost of replacing your possessions if your apartment is damaged.

For auto insurance each time you file a claim the cost of your insurance is likely to increase. If you carry a $500 deductible then you would never file a claim for a small parking lot ding that cost $1,000 since you would have to pay half the costs and then your premiums would jump. So, consider a higher $1,000 deductible to cover significant damages and pay the small damages from your emergency reserve. Also, if you have an older vehicle that is a low value, then consider dropping your collision insurance since you would likely buy a new car if you put your ’93 Honda Civic into a ditch and the $1,000 value paid from the collision policy wouldn’t help you much.  

An umbrella insurance policy provides additional coverage when a lawsuit brought over injuries and/or property damage exceeds the liability limits on your existing auto or home insurance. This coverage is very inexpensive and it can protect your remaining net worth that might not be covered by your base policies. If you want to purchase an umbrella policy then you will likely be required to maintain certain base levels of insurance on your existing home and auto policies.

Long-term Care

This insurance can provide for skilled nursing or in-home care for persons who can’t physically or mentally satisfy their daily life activities. Though many of us will likely need this care later in retirement, and it will likely be very expensive, you can normally self-insure this risk by building a large portfolio of investments and just spending from that pool of money when you need the care. This way you avoid paying the premium costs for many years leading up to when you need the coverage further helping you build your investment assets.

If your parents got a late start on their savings and don’t have a large pool of non-retirement assets to spend from then they may want to consider buying coverage.

In summary, remember how the insurance industry works. In general (more or less), they take in $1,000, invest it, pay expenses and pay out $700 a year or two later. So, if you can afford to self-insure you will on average be better off. Some win, more lose.